Mrs. Orville Isn’t Trying to Steal Tips: An FLSA Story

Introduction

A debate over tips and tipped employees, centered on a few provisions of the Fair Labor Standards Act1 (FLSA), has arisen among the circuits. Despite turning on only a few phrases in the FLSA, this judicial divide has massive implications for the restaurant and hospitality industries. One in ten working Americans is now employed in the restaurant industry,2 and the Internal Revenue Service (IRS) estimates that tips account for over $27 billion in wages each year.3 With such enormous stakes, this dispute has captured the attention of employee-rights advocates, restaurant and hospitality trade associations, and the Department of Labor (DOL).4

To illustrate this debate, consider a hypothetical family restaurant owned by a sole proprietor, Mrs. Orville. The restaurant has one cook, Chris, and two servers, Sam and Steph. In a typical restaurant, Sam and Steph will be the only employees interacting with customers during meals and, thus, the only employees who receive tips. Without any sharing arrangements, these servers will simply keep the tips they receive. However, servers often share tips with one another. Servers may do this to create a team culture in the restaurant, or to minimize the risks associated with the variance in party sizes and patron generosity. These sharing arrangements are called “tip pools.” Under these informal agreements, all tips are set aside as they come in, usually in a location maintained by the employer. The pooled tips are then redistributed to employees at a later time according to a set formula. This formula is usually based on the total amount of tips received and the amount of time worked by each employee. So if Sam earns $50 in tips and Steph earns $20 in tips while working the same number of hours, the pool of $70 would be split evenly between them into cuts of $35. If one server works more hours, he or she would then receive a larger portion of the pooled tips.

The debate considered in this Comment involves a variation on this hypothetical situation. If Sam and Steph grow fearful that Chris (the cook) will begin to shirk in the kitchen, they may decide to bring Chris into the tip pool. Their hope would be that including Chris in this pool will lead him to care more about the speed and quality of his output, as his performance will contribute to a diner’s experience and the eventual size of the tip (remuneration in which he now shares). This can also alleviate the disparity in take-home pay between the servers and Chris, again creating a team atmosphere among the restaurant’s workers. However, adding someone like Chris, who is not customarily tipped, is problematic under the FLSA and a recent DOL regulation. These problems become clearer when someone like Mrs. Orville, who waits tables but is also the owner of the restaurant, inserts herself into the tip pool. Should she be able to share in these tips? While she may be a coworker of the servers, her tip receipts look a bit like an employer siphoning tips away from employees. Several FLSA provisions deal with such a situation in only glancing fashion, but the DOL has addressed this issue head-on with a recent regulation. Essentially, this regulation completely prevents people like Chris and Mrs. Orville—who don’t normally receive tips—from participating in the tip pool. A circuit split has emerged as to the validity of this regulation.

This Comment argues that employers that pay their employees the minimum wage and do not take “tip credits” (a term discussed in Part I.C) should be able to set up tip pools that include nontipped employees. This becomes clear when, through the lens of Chevron “Step Zero,” an inquiry is made into whether the DOL has been delegated the authority to regulate in this arena at all. Such an examination must occur before looking at whether the statute is clear or the DOL action is reasonable at Chevron Steps One and Two, respectively.5 Within the Step Zero framework, the DOL regulation falls under the “major question” exception and thus must fail under judicial scrutiny.

This Comment proceeds as follows: Part I provides background about the FLSA, how this statute has historically dealt with tips, the Ninth Circuit’s Cumbie v Woody Woo, Inc6 decision, and the recent DOL regulation. Part II discusses the circuit split over whether the relevant DOL regulation should stand under a Chevron analysis. Part III provides a more robust answer by applying the Chevron Step Zero framework and concludes that this initial Chevron inquiry points to the regulation failing under the major question exception.